Regulatory steps, tight funding to weigh on credit growth, asset quality of banks, NBFCs: Icra

The agency also pointed out that high credit growth in the last two years in the retail segment, has potentially resulted in "over leveraging" in some asset segments

Banks and non-bank lenders may see a steady slowdown in credit growth because of the recent regulatory measures and tighter funding conditions, ratings agency Icra said in a statement on October 24.

According to Icra, the incremental bank credit growth may slow down to Rs 19-20.5 trillion in FY25, translating into a year-on-year growth of around 12 percent, which is lower than the FY24 growth rate of 16.3 percent to Rs 22.3 trillion.

The growth in assets under management (AUMs) of non-banking financial companies (NBFCs) is pegged at 16-18 percent for FY25, down from 25 percent recorded a year back.

“The recent regulatory actions on certain entities are expected to push others to adjust their business practices and models, which shall also have a bearing on near-term growth,” Icra said.

Non-banks' share in incremental credit flow too has fallen to 42.9 percent in the year ended August 2024 from 48.9 percent in the same period last year.

“The regulatory measures to slow down bank credit growth will be crucial for banks to cut their deposit rates, once the rate cut cycle starts. This will especially be important for maintaining the margins, as the cut in policy rates expected in H1 CY2025 will exert a downward pressure on lending rates. However, the proposed changes in guidelines for liquidity coverage ratio could mean that the immediate cut in deposit rates may not be very substantial, resulting in delayed transmission,” Anil Gupta, senior vice president and co-head financial sector ratings group at Icra, said.

The agency also pointed out that high credit growth in the last two years in the retail segment has potentially resulted in "over leveraging" in some asset segments, and a slower credit growth can "impair" the refinancing ability of some these borrowers, as the lenders become risk-averse.

"Such tightening often results in weaker borrowers falling behind in their repayments schedule, thereby increasing the asset quality pressure for the lenders," Gupta said.